Trade secret

"Trade Secrets" redirects here. For other uses, see Trade Secrets (disambiguation).

A trade secret is a formula, practice, process, design, instrument, pattern, or compilation of information which is not generally known or reasonably ascertainable, by which a business can obtain an economic advantage over competitors or customers. In some jurisdictions, such secrets are referred to as "confidential information" or "classified information".

Definition

The precise language by which a trade secret is defined varies by jurisdiction (as do the particular types of information that are subject to trade secret protection). However, there are three factors that, although subject to differing interpretations, are common to all such definitions: a trade secret is information that:

• is not generally known to the public;
• confers some sort of economic benefit on its holder (where this benefit must derive specifically from its not being generally known, not just from the value of the information itself);
• is the subject of reasonable efforts to maintain its secrecy.

By comparison, under US law, "A trade secret, as defined under 18 U.S.C. § 1839(3) (A), (B) (1996), has three parts: (1) information; (2) reasonable measures taken to protect the information; and (3) which derives independent economic value from not being publicly known."

Protection

A company can protect its confidential information through non-compete and non-disclosure contracts with its employees (within the constraints of employment law, including only restraint that is reasonable in geographic and time scope). The law of protection of confidential information effectively allows a perpetual monopoly in secret information - it does not expire as would a patent. The lack of formal protection, however, means that a third party is not prevented from independently duplicating and using the secret information once it is discovered.

The sanctioned protection of such type of information from public disclosure is viewed as an important legal aspect by which a society protects its overall economic vitality. A company typically invests money, time and energy (work) into generating information regarding refinements of processes and operations. If competitors had access to the same knowledge, the first company's ability to survive or maintain its market dominance or market position and market share would be impaired. Where trade secrets are recognized, the creator of knowledge regarded as a "trade secret" is entitled to regard such "special knowledge" as intellectual property.

In the United States, trade secrets are not protected by law in the same manner as trademarks or patents. Specifically, both trademarks and patents are protected under federal statutes, the Lanham Act and Patent Act, respectively. Instead, trade secrets are protected under state laws, and most states have ratified the Uniform Trade Secrets Act (UTSA), except for Massachusetts, New York, New Jersey, North Carolina, and Texas. One of the differences between patents and trademarks, on the one hand, and trade secrets, on the other, is that trade secret is protected only when the secret is not disclosed.

Comparison with trademarks

To acquire rights in a trademark under U.S. law, one must simply use the mark "in commerce." It is possible to register a trademark in the U.S., both at the federal and state levels. (Registration of trademarks confers some advantages, including stronger protection in certain respects, but it is not required in order to get protection.) Registration may be required in order to file a lawsuit for trademark infringement. Other nations have different trademark policies and this information may not apply to them. Assuming the mark in question meets certain other standards of protectibility, it is protected from infringement on the grounds that other uses might confuse consumers as to the origin or nature of the goods once the mark has been associated with a particular supplier. (Similar considerations apply to service marks and trade dress.) By definition, a trademark enjoys no protection (qua trademark) until and unless it is "disclosed" to consumers, for only then are consumers able to associate it with a supplier or source in the requisite manner. (That a company plans to use a certain trademark might itself be protectible as a trade secret, however, until the mark is actually made public.)

Comparison with patents

To acquire a patent, full information about the method or product has to be supplied to the patent office and upon publication or issuance, will then be available to all. After expiration of the patent, competitors can copy the method or product legally. The temporary monopoly on the subject matter of the patent is regarded as a quid pro quo for thus disclosing the information to the public.

One popular misconception held by many is that trade secret protection is incompatible with patent protection. It is typically said that if you apply for a patent you can no longer maintain a trade secret on the invention, but this is an oversimplification. It is true that in order to obtain a patent you must disclose your invention so that others will be able to both make and use the invention, and, to obtain a patent in the United States, if you have any preferences you must likewise disclose your preferences. What is typically not appreciated though is that the critical time for satisfying this disclosure requirement is at the time the application is filed. In many if not most situations, improvements will be made to an invention even after filing of the patent application, and additional information will be learned. None of this additional information must be disclosed and can instead be kept as a secret. Virtually all patent licenses include clauses that require the inventor to disclose any trade secrets they have. Frequently it is this information not disclosed in the patent that is the most commercially viable. Thus, if you are attempting to sell or license your patent rights you want to make sure that you take steps to continue to maintain your trade secrets as secrets, otherwise they will be lost. Accordingly, before disclosing any secrets not already protected by an issued patent you should use a non-disclosure agreement.

Protecting trade secrets

Trade secrets are by definition not disclosed to the world at large. Instead, owners of trade secrets seek to keep their special knowledge out of the hands of competitors through a variety of civil and commercial means, not the least of which is the use of non-disclosure agreements (NDA) and non-compete clauses. In exchange for an opportunity to be employed by the holder of secrets, an employee may sign an agreement not to reveal his or her prospective employer's proprietary information. An employee may also surrender or assign to his employer the right to his own intellectual work produced during the course (or as a condition) of employment. Violation of the agreement generally carries the possibility of heavy financial penalties. These penalties operate as a disincentive to reveal trade secrets. A holder of a trade secret may also require similar agreements from other parties he deals with, such as vendors or licensees.

Protection of trade secret can, in principle, extend indefinitely and therefore may provide an advantage over patent protection, which lasts only for a specific period of time. Coca-Cola, for example, has no patent for its formula and has been very effective in protecting it for many more years than the twenty years of protection that a patent would have provided. In fact, Coca-Cola refused to reveal its trade secret under at least two judges' orders. The disadvantage is that there is no protection once information protected as trade secret is uncovered by others through reverse engineering, for example, whereas patent has a guaranteed time of protection in exchange for disclosing the information to the public.

Discovering trade secrets

Companies often try to discover one another's trade secrets through lawful methods of reverse engineering on one hand, and potentially unlawful methods including industrial espionage on the other. Acts of industrial espionage are generally illegal in their own right under the relevant governing laws. The importance of that illegality to trade secret law is as follows: if a trade secret is acquired by improper means (a somewhat wider concept than "illegal means" but inclusive of such means), the secret is generally deemed to have been misappropriated. Thus if a trade secret has been acquired via industrial espionage, its acquirer will probably be subject to legal liability for acquiring it improperly. (The holder of the trade secret is nevertheless obliged to protect against such espionage to some degree in order to safeguard the secret. As noted above, under most trade secret regimes, a trade secret is not deemed to exist unless its purported holder takes reasonable steps to maintain its secrecy.)

Legal development to protecting trade secrets

History

Roman law

Commentators starting with A. Arthur Schiller assert that trades secrets were protected under Roman law by a claim known as, “actio servi corrupti,” interpreted as an “action for making a slave worse” (or an action for corrupting a servant). The Roman law is described as follows:

[T]he Roman owner of a mark or firm name was legally protected against unfair usage by a competitor through the action servi corrupti, . . . , which the Roman jurists used to grant commercial relief under the guise of private law actions. “If, as the writer believes [writes Schiller], various private cases of action were available in satisfying commercial needs, the state was acting in exactly the same fashion as it does at the present day.”

The suggestion that trade secret law has its roots in Roman law was introduced in 1929 in an article entitled, “Trade Secrets and the Roman Law: The Actio Servi Corrupti,” 30 Colum. L. Rev. 837 (1930). (The article has been reproduced in A. Arthur Schiller, An American Experience in Roman Law 1 (1971).) See Trade Secrets and Roman Law: The Myth Exploded, at 19. However, according to University of Georgia Law School professor Alan Watson, while the claim existed, it was not used to protect trade secrets. Trade Secrets and Roman Law: The Myth Exploded, at 19. Rather, Professor Watson explains as follows:

Schiller is sadly mistaken as to what was going on. . . . The action servi corrupti presumably or possibily could be used to protect trade secrets and other similar commercial interests. That was not is purpose and was, at most, an incidental spin-off. But there is not the slightest evidence that the action was ever so used. In this regard the action servi corrupti is not unique.

Exactly the same can be said of many private law actions including those for theft, damage to property, deposit, and production of property. All of these could, I suppose, be used to protect trade secrets, etc., but there is no evidence they were. It is bizarre to see any degree the Roman action servi corrupti as the counterpart of modern law for the protection of trade secrets and other such commercial interests.

Id.

19th century

Trade secret law as we know it today made its first appearance in England in 1817 in Newberry v. James, 35 Eng. Rep. 1011, 1013 (Ct. Ch. 1817), and in the United States in 1837 in Vickery v. Welch, 36 Mass. (19 Pick.) 523, 527 (1837). See The Surprising Virtues of Treating Trade Secrets as IP Rights, 61 Stan. L. Rev. at 315 & n.6. While those cases involved the first known common law causes of action based on a modern concept of trade secret laws, neither involved injunctive relief; rather, they involved damages only. Id. In England, the first case involving injunctive relief came in 1820 in Yovatt v. Winyard, (1820) 37 Eng. Rep. 425, 426 (Ch.), while in the United States, it took until 1866, in Taylor v. Blanchard, 95 Mass. (13 Allen) 370 (1866). See The Surprising Virtues of Treating Trade Secrets as IP Rights, 61 Stan. L. Rev. at 315 & n.7; but see Kewanee Oil Co. v. Bicron Corp., 416 U.S. 470, 493 n.23, 94 S.Ct. 1879, 1892 n.23, 40 L.Ed.2d 315 (1974) (trade secret law imported into the United States from England in 1868 in Peabody v. Norfolk, 98 Mass. 452 (1868)).

Trade secrets law continued to evolve throughout the United States, but as a hodgepodge of state laws. In 1939, the American Law Institute issued the Restatement of Torts, containing a summary of trade secret law as it then existed. That summary served as the primary resource until the latter part of the century. By now, however, only four states – Massachusetts, New Jersey, New York, and Texas – still rely on the Restatement as their primary source of guidance (other than their body of state case law).

Current regulation

Although trade secrets law evolved under state common law, prior to 1974, the question of whether patent law preempted state trade secrets law had been unanswered. In 1974, the United States Supreme Court issued the landmark decision, Kewanee Oil Co. v. Bicron Corp., 416 U.S. 470, 94 S.Ct. 1879, 40 L.Ed.2d 315 (1974), which resolved that question, and cleared the way for the states free to freely develop their own trade secret laws.

A relatively recent development in the United States is the adoption of the UTSA, the Uniform Trade Secrets Act, which has been adopted by approximately 46 states as the basis for trade secret law. Another significant development in U.S. law is the Economic Espionage Act of 1996 (18 U.S.C. §§ 1831–1839), which makes the theft or misappropriation of a trade secret a federal crime. This law contains two provisions criminalizing two sorts of activity. The first, 18 U.S.C. § 1831(a), criminalizes the theft of trade secrets to benefit foreign powers. The second, 18 U.S.C. § 1832, criminalizes their theft for commercial or economic purposes. (The statutory penalties are different for the two offenses.)

In Commonwealth common law jurisdictions, confidentiality and trade secrets are regarded as an equitable right rather than a property right (with the exception of Hong Kong where a judgment of the High Court indicates that confidential information may be a property right). The Court of Appeal of England and Wales in the case of Saltman Engineering Co Ltd v. Campbell Engineering Ltd, (1948) 65 P.R.C. 203 held that the action for breach of confidence is based on a principle of preserving "good faith".

The test for a cause of action for breach of confidence in the common law world is set out in the case of Coco v. A.N. Clark (Engineers) Ltd, (1969) R.P.C. 41 at 47:

• the information itself must have the necessary quality of confidence about it;
• that information must have been imparted in circumstances imparting an obligation of confidence;
• there must be an unauthorized use of that information to the detriment of the party communicating it.

The "quality of confidence" highlights that trade secrets are a legal concept. With sufficient effort or through illegal acts (such as break and enter), competitors can usually obtain trade secrets. However, so long as the owner of the trade secret can prove that reasonable efforts have been made to keep the information confidential, the information remains a trade secret and generally remains legally protected. Conversely, trade secret owners who cannot evidence reasonable efforts at protecting confidential information, risk losing the trade secret, even if the information is obtained by competitors illegally. It is for this reason that trade secret owners shred documents and do not simply recycle them.

A successful plaintiff is entitled to various forms of judicial relief, including:

• an injunction
• an account of profits or an award of damages
• a declaration

Cases

• Data General Corp. v. Digital Computer Controls, Inc., 297 A.2d 433 (Del. Ch. 1971): protection and disclosure of design documents.
• Rivendell Forest Prods. v. Georgia-Pacific Corp., 28 F.3d 1042: trade secrets and software systems.
• IBM v. Papermaster (No. 08-9078, 2008 U.S. Dist): Mark Papermaster moving from IBM to Apple computer in 2008.

See also

• Glossary of legal terms in technology
• Biswamohan Pani, charged in 2008 with stealing $1 billion worth of trade secrets from Intel
• Data General Corp. v. Digital Computer Controls, Inc. addressing secrecy given widespread disclosure

External links

• Economic Espionage and Trade Secrets U.S. Attorneys' Bulletin (2009).
• International Aspects of Trade Secrets Law by Karen A. Magri.
• "Chapter 15: Trade Secrets and Confidential Relations". The Law of Unfair Business Competition. Baker, Voorhis. 1909.
• Protecting trade secrets under the Uniform Trade Secrets Act. Greenwood Publishing Group. 1996. ISBN 9781567200164.
• Rockman, Howard B. (2004). "25.3: Nature of a Trade Secret". Intellectual property law for engineers and scientists. Wiley-IEEE. ISBN 9780471449980.
• Becker, Susan J. (2005). "Chapter 13: Trade Secrets and Confidential Commercial Information". Discovery from Current and Former Employees. American Bar Association. ISBN 9781590314852.
• Epstein on intellectual property. Aspen Publishers Online. 2004. ISBN 9780735503199.
• "Trade Secrets". International guide to privacy. American Bar Association. 2004. ISBN 9781590313336.
• Snider, Jerome G.; Ellins, Howard A. (2006). "Chapter 8: Trade Secrets and Business Strategy". Corporate Privileges and Confidential Information. Law Journal Press. ISBN 9781588520876.
• "Chapter 7: Misappropriation of Trade Secrets". Business torts & unfair competition. American Bar Association. 1996. ISBN 9781570732942.